WEBVTT - Fed Holds Rates As Warsh Takes Helm

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Welcome to the Daybreak

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<v Speaker 1>Asia podcast. I'm Doug Christner, and today we begin with

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<v Speaker 1>the FED. On Wednesday, members of the FOMC voted unanimously

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<v Speaker 1>to leave interest rates unchanged. Now that move was widely expected.

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<v Speaker 1>The raid on FED funds held steady in a range

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<v Speaker 1>of three and a half to three and three quarters percent.

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<v Speaker 1>Now officials also signaled their next move maybe to raise

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<v Speaker 1>interest rates, not cut them, given the outlook for higher inflation.

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<v Speaker 1>Here is FED Share Kevin Walsh at his first post

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<v Speaker 1>meeting news conference.

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<v Speaker 2>Persistently high prices our burden for the American people, but

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<v Speaker 2>the recent past need not be prologed. I am pleased

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<v Speaker 2>to report that members of the FOMC are unambiguous and unanimous.

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<v Speaker 2>This committee will deliver price stability.

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<v Speaker 1>Fed Share Kevin Worsh. There for a closer look, I'm

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<v Speaker 1>joined by Jeffrey Roche. He is the chief economist at

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<v Speaker 1>LPL Financial. Jeffrey, thank you so much for being with us.

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<v Speaker 1>It seems to me this tone was maybe a little

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<v Speaker 1>more hawkish that the market was expecting. So can you

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<v Speaker 1>put that in context? Given the fact that this was

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<v Speaker 1>Worsh's first meeting. I'm wondering whether he was trying to

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<v Speaker 1>buy a little bit of credibility perhaps with the bond market.

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<v Speaker 1>Is that possible, Well, I.

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<v Speaker 3>Think, you know, there was a lot of pressure on Worsh.

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<v Speaker 3>There was a lot of chatter that he was going

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<v Speaker 3>to be a puppet to the president. Obviously he was

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<v Speaker 3>picked by the President and confirmed then by the Senate,

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<v Speaker 3>but it was all in the context of being a

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<v Speaker 3>dovish leader the FED. I think Worsh did the right

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<v Speaker 3>thing today that he came out with a big bark.

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<v Speaker 3>Maybe the bark's going to be worse than the bite.

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<v Speaker 3>I'm not sure. Time will tell, but he was terse

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<v Speaker 3>kurt straight to the point. I think he did what

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<v Speaker 3>had to be done. That the bigger concern is runaway inflation.

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<v Speaker 3>It's not necessarily something where we're thinking about the brinks

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<v Speaker 3>of recession. So I think he balanced it quite well.

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<v Speaker 1>There have been a lot of questions, perhaps some concerns

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<v Speaker 1>even about the degree to which the FED is going

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<v Speaker 1>to alter its communication style with markets, and Warsh said

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<v Speaker 1>today that the FED has dropped forward guidance. Is that

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<v Speaker 1>a problem in your opinion.

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<v Speaker 3>Well, it's a little bit of a misnomer because we

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<v Speaker 3>certainly got plenty of forward guidance from the Summary of

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<v Speaker 3>economic projections. So what was a little bit surprising, and

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<v Speaker 3>this certainly was making a statement, was the very short

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<v Speaker 3>statement released earlier thirty minutes before the chair started his

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<v Speaker 3>press conference, roughly one hundred and thirty words or so.

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<v Speaker 3>The previous statement was roughly triple that. So he certainly

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<v Speaker 3>is going straight to the point. But I don't know

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<v Speaker 3>what's going to happen with the summary acond of projections.

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<v Speaker 3>He did hint at saying that he was not participating

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<v Speaker 3>in the forecast this time around, but there were plenty

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<v Speaker 3>of committee members that did participate with those dot plots,

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<v Speaker 3>So in some ways, the markets did get plenty of

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<v Speaker 3>forward guidance. We did get an updated dot plot. We

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<v Speaker 3>did get more information that several of these governors and

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<v Speaker 3>district presidents are more so inclined now to indeed hike

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<v Speaker 3>hence the uptick and expectations from futures markets. So we're

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<v Speaker 3>still a little bit in the dark because we don't

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<v Speaker 3>know how much change worsh will enact after these task

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<v Speaker 3>forces come with their recommendations.

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<v Speaker 1>Well, I'm glad you bring up that fact. Because as

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<v Speaker 1>a part of his opening remarks, worsh did announce the

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<v Speaker 1>creation of multiple task forces I think five areas, and

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<v Speaker 1>the aim here is to change the way that the

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<v Speaker 1>FED operates. If you were advising the FED, I hate

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<v Speaker 1>to put you in a tough position, but I'm going

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<v Speaker 1>to anyway, how could the FED improve the way that

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<v Speaker 1>it operates? Are there things that are a little antiquated

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<v Speaker 1>right now that need to be addressed to improve the

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<v Speaker 1>functioning not only of the regulatory regime, but the transmission

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<v Speaker 1>mechanism and the way in which kind of markets respond

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<v Speaker 1>to what the FED is trying to achieve.

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<v Speaker 3>Well, I would say unambiguously, I was pretty excited to

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<v Speaker 3>hear that one of the five task forces will be

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<v Speaker 3>about data collection and the updating on data. I think

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<v Speaker 3>that is a very fair point for the chair to

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<v Speaker 3>call that out on the press conference, that there are

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<v Speaker 3>things either the methodology or the survey calculations. There are

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<v Speaker 3>a number of ways that we legitimately could update and

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<v Speaker 3>bring into the current times and fix some of the

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<v Speaker 3>antiquated data that we rely on as private sector economists,

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<v Speaker 3>no doubt public sector FED officials as well, so very

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<v Speaker 3>happy with some of these task force setups could be

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<v Speaker 3>on net markets for investors on net This could actually

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<v Speaker 3>be a very good thing. Now. The hard part, of course,

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<v Speaker 3>is in the interim, waiting and somewhat being a little

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<v Speaker 3>bit in the fog as we sit here today.

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<v Speaker 1>Most definitely, particularly where the effects of the war with

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<v Speaker 1>Iran are concerned and higher energy prices. But money markets

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<v Speaker 1>right now, you talked about the market response in terms

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<v Speaker 1>of futures, money markets are fully pricing in a quarter

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<v Speaker 1>point FED hike by October, maybe another one by March.

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<v Speaker 1>I think that's been fully priced in as well. Does

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<v Speaker 1>the market seem right now to be a little too

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<v Speaker 1>optimistic about the degree to which the Fed might titan.

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<v Speaker 3>Well, I don't think the market has it right. We've

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<v Speaker 3>seen this before, where market futures markets respond to the

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<v Speaker 3>press conference, whether it's warsh Er, whether it's Powell or

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<v Speaker 3>Bernaki or yelling green Span. Even so, I think markets

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<v Speaker 3>are a little bit ahead of themselves. And the reason

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<v Speaker 3>why I say that is because we know from the

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<v Speaker 3>statement from the chair's own mouth during the press conference

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<v Speaker 3>that a lot of these inflationary pressures are supply driven,

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<v Speaker 3>and we know that those things can reverse quite quickly.

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<v Speaker 3>And when that does, you'll have a very very different

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<v Speaker 3>inflation dynamic.

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<v Speaker 1>What is your sense of the inflation problem right now?

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<v Speaker 1>I don't want to use the term transitory. I'm sure

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<v Speaker 1>it was thrown around a lot today by commentators looking

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<v Speaker 1>at the Fed's decision. Do you think this is a

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<v Speaker 1>temporary thing that we are going to experience as a

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<v Speaker 1>result of the war with Iran or are we at

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<v Speaker 1>risk for higher prices to remain embedded in the economy

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<v Speaker 1>for the foreseeable future.

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<v Speaker 3>Well, I do think that there is some time stamp

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<v Speaker 3>on the energy related inflation we're seeing clearly connected to

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<v Speaker 3>the Middle East crisis. One thing that I don't know,

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<v Speaker 3>and I'm a little bit nervous about, is the embedded

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<v Speaker 3>inflation pressures from households that have a lot of cash.

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<v Speaker 3>There are plenty of households. When you look at household

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<v Speaker 3>net worth relative to disposable personal income that is at

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<v Speaker 3>a very very high ratio. And so from the demand

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<v Speaker 3>side of the equation, we still see a lot of

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<v Speaker 3>households spending on a number of durable goods, certainly non durables.

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<v Speaker 3>Starting to see a little bit of slow down in

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<v Speaker 3>terms of travel plans and services, in that regard, but

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<v Speaker 3>there is a strong demand for several sectors in the

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<v Speaker 3>economy that are demand driven that will stick around a

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<v Speaker 3>lot longer than the components that are supply driven.

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<v Speaker 1>The President has made trade policy a cornerstone of his

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<v Speaker 1>administration's economic plan, and one of the things that we

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<v Speaker 1>saw today as a result of the price action in

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<v Speaker 1>the bond market a much much stronger dollar. I think

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<v Speaker 1>the Bloomberg Dollar Spot index was up about seven tens

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<v Speaker 1>to one percent today. If the dollar does remain at

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<v Speaker 1>these levels, is that problematic for US trade?

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<v Speaker 3>Well, certainly, we've seen a pretty strong and solid relationship

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<v Speaker 3>between dollar performance and import prices, So in some ways

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<v Speaker 3>the biggest risk to strong dollars probably emerging markets, not

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<v Speaker 3>necessarily domestically inside the United States. I think what this

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<v Speaker 3>tells me, though, is whenever there's this move toward dollar assets,

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<v Speaker 3>when there's periods of uncertainty, in some ways, it embeds

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<v Speaker 3>in my mind the view that the dollar is still

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<v Speaker 3>this safe haven asset. In some ways, you can argue

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<v Speaker 3>from that that you still have a little bit of

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<v Speaker 3>benefit and the exorbitant privilege, as it were, for US

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<v Speaker 3>markets because of.

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<v Speaker 1>That, all right, Jeffrey we'll leave it there. Good stuff,

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<v Speaker 1>Thank you so very much. Jeffrey Roachi is the chief

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<v Speaker 1>economist at LPL Financial. Joining us here on the Daybreak

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<v Speaker 1>Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm

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<v Speaker 1>Doug Chrisner. Equity markets across the APAC region are reacting

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<v Speaker 1>to the FED signaling it may need to raise interest

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<v Speaker 1>rates further to contain inflation. Now, US money markets have

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<v Speaker 1>fully priced in a quarter pl point FED hike by

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<v Speaker 1>October and another hike by March of next year. However,

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<v Speaker 1>Home and Lee, the senior macro strategist at Lombard Oda,

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<v Speaker 1>says the FED will hold great steady until the end

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<v Speaker 1>of the year. Homan spoke about his outlook with Bloomberg

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<v Speaker 1>TV host April Home.

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<v Speaker 4>So you think no change till the end of the year.

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<v Speaker 5>Well, that's still our base case, even though this meeting

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<v Speaker 5>proved to be a little more hawkish than what we expected.

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<v Speaker 5>So there is a bit of a growing challenge to

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<v Speaker 5>our scenario. At the end of the day, label market

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<v Speaker 5>has been fairly solid, and that capital markets have been

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<v Speaker 5>quite buoyant in terms of the activities and sentiment, and

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<v Speaker 5>inflation still remains about targets, so it makes sense why

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<v Speaker 5>they're removing the dubbish language from the statement and the communication.

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<v Speaker 5>But you know, the backdrop before the meeting was that

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<v Speaker 5>of disruptions in the strait of homos and energy market

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<v Speaker 5>instability that's now fading from the view. So it's in

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<v Speaker 5>entirely puzzle that a few months from now the assessment

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<v Speaker 5>of some of these median dots suggesting great hike could

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<v Speaker 5>actually change. So for these reasons, we still think it

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<v Speaker 5>makes sense for the fact to be a little more

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<v Speaker 5>patient and look through this core inflation spike that could

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<v Speaker 5>prove temporary and simply stand on the sidelines until the

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<v Speaker 5>end of the year. But we have the acknowledge given

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<v Speaker 5>the message, especially the repeated emphasis and price stability from

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<v Speaker 5>a chairman Wash, a chair Wash and his initiative to

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<v Speaker 5>maybe change the communication framework, maybe there's a degree of

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<v Speaker 5>caution that's required as we go forward.

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<v Speaker 4>So what we're seeing in markets today, specifically on the

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<v Speaker 4>bond market reaction, do you think that's appropriate? Should we

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<v Speaker 4>be expecting more volatility there?

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<v Speaker 5>We think our assessment is that the current bond market

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<v Speaker 5>pricing is a little bit excessive at the global level

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<v Speaker 5>level and also potentially for the US treasury market. And

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<v Speaker 5>if you have a hockey central bank that increases the

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<v Speaker 5>chance of price stability in the medium term, there's actually

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<v Speaker 5>not a bad news for bond market in the medium term.

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<v Speaker 5>So we think the current rate pricing in the bond

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<v Speaker 5>market more or less reflect what's achievable from many of

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<v Speaker 5>these major central banks. Actually, some bond marketers are so

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<v Speaker 5>slightly excessive pricing for that. So there we already see

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<v Speaker 5>some opportunities. We're not uh uh, you know, keen on

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<v Speaker 5>increasing the duration risks significantly, but we do see opportunities

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<v Speaker 5>in places like Europe and Asia, Australia for instance, where

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<v Speaker 5>you know, the rate hikes recently could actually provide a

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<v Speaker 5>better trajectory for bond market participants in the future.

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<v Speaker 4>In Japan, do we just do you clear that?

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<v Speaker 5>Well, Japan is a slightly trickier story to be frank

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<v Speaker 5>So Boja delivered that rate hike and we currently assume

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<v Speaker 5>for the base case semi annual rate hikes, so the

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<v Speaker 5>next move will likely occur in December. But you know,

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<v Speaker 5>the intervention from the Finance ministry and the bank. You know,

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<v Speaker 5>of course, great high by the Bank of Japana guidance

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<v Speaker 5>for additional hike have not delivered the stability for the

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<v Speaker 5>end yet, so that's a bit of concern. And we

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<v Speaker 5>also have to wait for the fiscal policy signals from

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<v Speaker 5>the cabinet regarding their medium term strategy. So these developments

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<v Speaker 5>need to be digestif by the market participants before we

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<v Speaker 5>can be more aggressive. So when it comes to Japanese

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<v Speaker 5>yel curve, we're slightly more neutral as opposed to European

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<v Speaker 5>and Australian curves.

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<v Speaker 4>A wonderful equity though as long as yen remains roughly stable,

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<v Speaker 4>it's a positive enough backdrop to a lot further gains.

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<v Speaker 4>I mean, you look at how things are firing in

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<v Speaker 4>the early goings today, it looks like, you know, investors

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<v Speaker 4>are still banking on that memory up cycle chip surge.

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<v Speaker 5>Well, first of all, if you look at the fundamentals

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<v Speaker 5>of the Japanese economy, it's still pretty solid despite the

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<v Speaker 5>shocks that it has gone through due to the situation

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<v Speaker 5>in the Strait of Homus. As you said, it's an

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<v Speaker 5>economy that's prime to respond very positively the global capac cycle,

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<v Speaker 5>and this is a cycle that will get additional support

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<v Speaker 5>from the regulation of the risk in the strait of

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<v Speaker 5>Homus because countries around the world they'll try to boost

0:14:09.559 --> 0:14:12.480
<v Speaker 5>their infrastructure even further in reaction to this, and Japan

0:14:12.600 --> 0:14:14.679
<v Speaker 5>is perfectly positioned for that. And of course there are

0:14:14.720 --> 0:14:18.319
<v Speaker 5>AI plays, the pixel shovels place, you know, nan memory

0:14:18.520 --> 0:14:22.560
<v Speaker 5>and the ceramic capacitors. All these producers are still in Japan,

0:14:22.800 --> 0:14:26.600
<v Speaker 5>so they also benefit. So that's the fundamental picture in

0:14:26.640 --> 0:14:28.080
<v Speaker 5>our view, which I suppose.

0:14:27.800 --> 0:14:29.800
<v Speaker 4>To help career as well as the same.

0:14:29.600 --> 0:14:33.640
<v Speaker 5>Fundamentals exactly exactly, so when it comes to the central

0:14:33.640 --> 0:14:37.320
<v Speaker 5>bank policy in Asia Pacific region, we're in a pretty

0:14:37.360 --> 0:14:41.120
<v Speaker 5>interesting place in my view. So for Japan, for the corporates,

0:14:41.640 --> 0:14:45.840
<v Speaker 5>the stable yen around this level still promises potential further

0:14:45.920 --> 0:14:49.600
<v Speaker 5>upgrading earnings growth for the Japanese companies, But for the

0:14:49.920 --> 0:14:53.360
<v Speaker 5>other Asia Pacific companies, especially in North Asia, there's an

0:14:53.360 --> 0:14:57.880
<v Speaker 5>additional tailwind now from the regulational risk in Homus, and

0:14:57.920 --> 0:15:00.440
<v Speaker 5>that's the reason why we still remain constructive for this

0:15:00.480 --> 0:15:02.880
<v Speaker 5>segment of Asia Pacific region for career.

0:15:02.920 --> 0:15:06.520
<v Speaker 4>Also even as an em you know, even if we

0:15:06.560 --> 0:15:10.120
<v Speaker 4>see a bit of hikes, they can still sort of

0:15:10.160 --> 0:15:12.640
<v Speaker 4>overcome that given how we're seeing these tail winds from

0:15:12.640 --> 0:15:15.520
<v Speaker 4>their memory up cycle, So we.

0:15:15.480 --> 0:15:18.320
<v Speaker 5>Still subscribe to the view that memory remains a key

0:15:18.360 --> 0:15:23.560
<v Speaker 5>bottleneck in the overall AI development. So that's still positive

0:15:23.560 --> 0:15:25.840
<v Speaker 5>for the country. And we continue to see volent is

0:15:25.960 --> 0:15:29.000
<v Speaker 5>upgrade in the earnings outlook for Korea, not just this

0:15:29.120 --> 0:15:33.280
<v Speaker 5>year but also next year, so that's positive. Now regarding

0:15:33.280 --> 0:15:37.280
<v Speaker 5>the external developments, clearly the resolution risk and homos because

0:15:37.360 --> 0:15:40.360
<v Speaker 5>Korea is a heavy net import or energy from elsewhere,

0:15:41.000 --> 0:15:44.480
<v Speaker 5>it's going to be a certainly a tailwind. And finally,

0:15:44.640 --> 0:15:47.120
<v Speaker 5>when it comes to monitoring policy, we do expect now

0:15:47.160 --> 0:15:50.840
<v Speaker 5>some raid hikes down the road, but for the corporate

0:15:51.160 --> 0:15:53.200
<v Speaker 5>we think that's a manageable event because we don't think

0:15:53.200 --> 0:15:56.240
<v Speaker 5>that the OKAY will be very aggressively hawkish on monitoring policy.

0:15:56.240 --> 0:15:58.040
<v Speaker 4>I have to ask you on China though, because we

0:15:58.120 --> 0:16:00.440
<v Speaker 4>got some signals from the PBOC yesterday, do you think

0:16:00.480 --> 0:16:02.880
<v Speaker 4>this is a central bank that's kind of moving towards

0:16:02.920 --> 0:16:06.960
<v Speaker 4>what a DM regime would look like, something more like

0:16:06.960 --> 0:16:08.360
<v Speaker 4>what is major peers are doing.

0:16:08.640 --> 0:16:10.920
<v Speaker 5>So this is part of the medium transition that we

0:16:11.000 --> 0:16:13.320
<v Speaker 5>have seen for quite some time now, you know, moving

0:16:13.320 --> 0:16:17.240
<v Speaker 5>from the deposit rate to the market based rate a

0:16:17.240 --> 0:16:20.760
<v Speaker 5>few years ago, and then changing the framework again in

0:16:20.760 --> 0:16:24.280
<v Speaker 5>twenty twenty four, so it's actually a continuation of a

0:16:24.360 --> 0:16:27.720
<v Speaker 5>trend from our perspective, So the PBOC is quite keen.

0:16:27.880 --> 0:16:30.760
<v Speaker 5>It seems to move to a market price, a price

0:16:30.760 --> 0:16:33.560
<v Speaker 5>based in a monetary policy regime. And now they're moving

0:16:33.560 --> 0:16:36.080
<v Speaker 5>the benchmark from seven day to one day, just like

0:16:36.120 --> 0:16:40.520
<v Speaker 5>the other developed market peers. However, they still seem pretty

0:16:40.640 --> 0:16:45.160
<v Speaker 5>keen on keeping the control and capital accounts and targeting currency.

0:16:45.440 --> 0:16:49.160
<v Speaker 5>Those are the fundamental constraints and moving fully to a

0:16:49.280 --> 0:16:53.960
<v Speaker 5>price based monetary policy. And for that reason, despite these efforts,

0:16:54.000 --> 0:16:57.520
<v Speaker 5>we think the near time implications are quite limited for

0:16:57.560 --> 0:16:58.440
<v Speaker 5>the Chinese market.

0:16:58.840 --> 0:17:02.000
<v Speaker 1>That was Home and League senior macro strategist at Lombard

0:17:02.000 --> 0:17:05.879
<v Speaker 1>Odia speaking with Bloomberg TV host Avril Hong, bringing you

0:17:05.920 --> 0:17:11.639
<v Speaker 1>their conversation here on the Daybreak Asia Podcast. Thanks for

0:17:11.720 --> 0:17:16.320
<v Speaker 1>listening to today's episode of the Bloomberg Daybreak Asia Edition podcast.

0:17:16.640 --> 0:17:19.800
<v Speaker 1>Each weekday, we look at the story shaping markets, finance,

0:17:20.119 --> 0:17:23.199
<v Speaker 1>and geopolitics in the Asia Pacific. You can find us

0:17:23.240 --> 0:17:27.440
<v Speaker 1>on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere

0:17:27.480 --> 0:17:30.560
<v Speaker 1>else you listen. Join us again tomorrow for insight on

0:17:30.600 --> 0:17:34.760
<v Speaker 1>the market moves from Hong Kong to Singapore and Australia.

0:17:35.160 --> 0:17:37.639
<v Speaker 1>I'm Doug Chrisner, and this is Bloomberg