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Speaker 2: This is the Bloomberg Daybreak Aisia podcast. I'm Doug Prisner.
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Speaker 3: Joining us now in our studios in Hong Kong is
Speaker 3: Stephanielum who is CIO at Stashaway. For a closer look
Speaker 3: at markets, perhaps you can get to China in a moment.
Speaker 3: Let's take a quick look at what we see coming
Speaker 3: out of the United States. Very strong growth. The economy
Speaker 3: seems to be really firing on all cylinders here and
Speaker 3: it's causing a little bit of concern about those who
Speaker 3: are watching inflation carefully. Stephanie, do you think inflation is
Speaker 3: still coming down or should we worry about a reversal?
Speaker 4: Yeah, I think if you look at the latest kind
Speaker 4: of growth data, particularly in the jobs market, the US
Speaker 4: has been surprisingly strong to a lot of people. And
Speaker 4: just think back about three four months ago at the
Speaker 4: beginning of the year, the market is actually looking for
Speaker 4: the FED to start cutting interest rates in March by
Speaker 4: about five six times by the end of this year. Now,
Speaker 4: of course, those expectations have been dial back, and right now,
Speaker 4: I mean the market is looking at kind of the
Speaker 4: second half of the year for the first rate cut,
Speaker 4: and perhaps I mean some participants anticipate even later. The
Speaker 4: FED itself has signaled that they will do three rate cuts.
Speaker 4: Now the market is closer to what the FIL's expecting. However,
Speaker 4: we do see some risks that inflation could be kind
Speaker 4: of staying higher for longer. And this is something that
Speaker 4: we've flagged out in I guess since the past twelve months,
Speaker 4: in the sense that if you look at the labor market,
Speaker 4: the US labor market, there's reason why it's so strong.
Speaker 4: If you look at COVID, COVID actually took away a
Speaker 4: lot of jobs, a lot of people actually left their workforce.
Speaker 4: I mean those people actually never came back. So if
Speaker 4: you look at what the structural shortage of the US
Speaker 4: labor market, the US is still short of one million
Speaker 4: labor workers compared to pre COVID, and it takes time
Speaker 4: for these jobs to be filled or for these people
Speaker 4: to kind of move jobs, etc. So it's a structural
Speaker 4: problem that we see and this playing app So.
Speaker 2: Is this reacceleration of growth as you're describing it in
Speaker 2: the United States? Is that unique to the US. Are
Speaker 2: we seeing growth reaccelerate in other parts.
Speaker 5: Of the world.
Speaker 2: Yeah.
Speaker 4: Indeed, the job's tightness is not just particular for the US.
Speaker 4: We're seeing the same phenomenon in other developed markets, for
Speaker 4: example the UK or other European countries. However, if you
Speaker 4: look at the manufacturing cycle, the global manufacturing cycle has
Speaker 4: actually been in a downturn for the last eighteen months.
Speaker 4: Even that we're seeing signs of bottoming out. So when
Speaker 4: you look at the manufacturing sector, which has been relatively
Speaker 4: we compared to the service sector, the man of factoring
Speaker 4: sector is rebounding, and we see it in the latest
Speaker 4: PMI data, not just from the US, from a global perspective.
Speaker 4: And also, I think if you look at China data,
Speaker 4: China data seems to be bottoming as well. Right if
Speaker 4: you look at CPI that has turned past it for
Speaker 4: the first time in the last sort of like twelve
Speaker 4: to eighteen months. If you look at the China PMI
Speaker 4: that has also surpassed expectations. Now atbove fifty again, So.
Speaker 3: This has very wide implications for risk assets. I would
Speaker 3: think in the sense that you know, we have discounted
Speaker 3: a lot in the gains that we've seen in the
Speaker 3: US market AI and perhaps you know the FED cutting
Speaker 3: interest rates. I'm not sure we've really discounted you know,
Speaker 3: concerted global growth reigniting here.
Speaker 4: Yeah, And I mean this is not where funds are
Speaker 4: position If you look at like where the crowded possessions are,
Speaker 4: I mean those are off in technology AI kind of
Speaker 4: acceectors that are not as leverage to the global cycle.
Speaker 4: And I think what you've seen in the past two
Speaker 4: weeks or so in the price action of a lot
Speaker 4: of commodities, a lot of cyclicals, is that there's been
Speaker 4: a very very fast catch up to this kind of
Speaker 4: imbalanced in terms of positioning. Now, of course, from a
Speaker 4: market perspective, from a risk asset perspective, we think that
Speaker 4: this kind of high for longer environment may not be
Speaker 4: necessarily bad for equities per se, because companies actually do
Speaker 4: pretty well in this kind of inflationary growth environment that
Speaker 4: we identify. However, the leadership is going to be a
Speaker 4: bit more spread out, not just focused on the AI
Speaker 4: companies not just focus on Magnificent seven, but it's spreading
Speaker 4: out to cyclicals. So we think there's still i mean
Speaker 4: opportunity for its ketchup to go give it a low positioning.
Speaker 2: What about the Japanese equity market. We've got the nie
Speaker 2: k today up about four hundred points. We broke about
Speaker 2: forty grand last week. We're very close to that now
Speaker 2: six hundred points shy of that level. Is there still
Speaker 2: opportunity in Japan? Do you think? Yeah?
Speaker 4: I think from a short term perspective, I mean, things
Speaker 4: are a bit overbought, and there's kind of concern about
Speaker 4: the yeah and potentially getting intervention from the boj However,
Speaker 4: if you look at a longer time frame, we're actually
Speaker 4: structurally a lot more possile in Japan compared to other
Speaker 4: Asia Pacific kind of economies, because there are signs that
Speaker 4: Japan is finally getting of deflation, and deflation has been
Speaker 4: kind of the worry about central bank, the worry of
Speaker 4: Japan for the last thirty years.
Speaker 6: So if you look at Nikki.
Speaker 4: Itself, for example, it has just surpassed the high that
Speaker 4: it made in the early eighties. So this deflationary kind
Speaker 4: of end of deflationary era is going to play out
Speaker 4: over the next few years. So I think if there's
Speaker 4: a correction in Japan, it would be a good time
Speaker 4: for investors to accumulate, if they're not exposed already.
Speaker 3: So there are a lot of aspects of the current
Speaker 3: environment that look very positive, particularly for investing in risk assets.
Speaker 3: You have inflation arguably coming down in the US, and
Speaker 3: you have wages that are at four point one percent
Speaker 3: higher than inflation, protecting workers there to a certain degree.
Speaker 3: And yet the Fed funds rate is well above that
Speaker 3: rate at five and a half percent or so. But
Speaker 3: that worries some people when things look too good, you know,
Speaker 3: it makes you nervous. Should we be nervous?
Speaker 4: Yes, I am. I'm actually I think if we think
Speaker 4: about where which as a classes we're worried about, we're
Speaker 4: actually worry about government bonds duration. Given that the narrative
Speaker 4: of high for longer may be here to stay with
Speaker 4: us for the next few years. I think bonds actually
Speaker 4: have less become less attractive in this environment.
Speaker 6: And you're seeing it in.
Speaker 4: Sort of the breakout of goal as well. So gold
Speaker 4: actually had a breakout in March and a lot of
Speaker 4: people wondering, I mean, why is goal breaking out. There's
Speaker 4: no kind of snic the news, there's no actually large
Speaker 4: buying actions. I think what the market is sniffing out
Speaker 4: is that in March we had a very very strong
Speaker 4: US data coming out, which surprised everybody. However, the FED
Speaker 4: is still sticking to is a rate cut of three
Speaker 4: times this year. So the fat is telling you that,
Speaker 4: I mean, they're willing to sustain. They're willing to kind
Speaker 4: of stomach higher inflation in the future compared to what
Speaker 4: they've done in the past. And I think that's what
Speaker 4: the goal market is telling us, is that in this
Speaker 4: kind of high inflation environment, bond investors should be thinking
Speaker 4: about I mean goal instead or other kind of commodities instead.
Speaker 4: So I think that is the reason.
Speaker 2: Last question. You know, we had a US based investor
Speaker 2: visiting Hong Kong last week and when I asked her,
Speaker 2: one of the things that was most surprising, she said
Speaker 2: that most people in Hong Kong feel as though Donald
Speaker 2: Trump would be elected president. I mean, if that's the case,
Speaker 2: what does a Trump presidency do to your thesis on
Speaker 2: putting money to work.
Speaker 4: Yeah, I think we put out a piece looking at
Speaker 4: kind of like, what are the policy implications of buy
Speaker 4: the versus Trump. I think, of course, right now is
Speaker 4: still way too early. We've still got a few months ago. However,
Speaker 4: I think one of the things that we're looking at
Speaker 4: is sort of the historical precedence of this, and we
Speaker 4: think that actually the correct situation still favors Biden.
Speaker 6: So we'll see, I mean a few months later.
Speaker 3: All right, Stephanie, thank you very much for joining us.
Speaker 3: I'm sure we'll have you in our studios a few
Speaker 3: times between now and then. Stephanie lynge cio.
Speaker 6: At Stashaway.
Speaker 3: Joining us now for some discussion of markets is Nancy Davis,
Speaker 3: founder and portfolio manager at Quadratic Capital Management. Well, we
Speaker 3: had that strong jobs month of job creation during the
Speaker 3: last month, Nancy, and I wonder whether or not, since
Speaker 3: this may not sit so well with the Fed, whether
Speaker 3: we'll see a lot more hawkish commentary coming from the Fed.
Speaker 1: Well, you know this payroll report, it was the fourth
Speaker 1: consecutive upside surprise, and now most of the job gains
Speaker 1: were in healthcare and government. But you know, definitely the
Speaker 1: market expectations for the rate cuts have fallen dramatically in
Speaker 1: twenty twenty four, We're now pricing about two and a
Speaker 1: half rate cuts, as you can see on your Bloomberg terminal,
Speaker 1: and that's a lot less than where we started the
Speaker 1: year at about six cuts. But there is still room
Speaker 1: if the job's data continues to be so hot. I
Speaker 1: guess we'll see what the CPI print brings this week.
Speaker 3: In the US, we.
Speaker 2: Were talking a moment ago about the oil price. I mean,
Speaker 2: we have a brent just under ninety one bucks at
Speaker 2: the moment. There's a lot of talk on the straight
Speaker 2: about the possibility of a resurgence and commodity driven inflation.
Speaker 2: Are you concerned about that at all and how that
Speaker 2: may force the Fed to really do nothing in terms
Speaker 2: of changing policy.
Speaker 6: You know, it's definitely a concern.
Speaker 1: There's so many all so climate as well as other
Speaker 1: things going on around the world, whether it's the droughts
Speaker 1: or even the bridge that just broke down, that's really
Speaker 1: going to probably be driving the price of oil specifically.
Speaker 1: But if you look at the commodities index, a lot
Speaker 1: of the rally is actually cocoa like chocolate. So I
Speaker 1: think the index overall for the commodities market is a
Speaker 1: little kind of distorted because of that huge spike in cocoa.
Speaker 1: But I definitely think the FED is keeping an eye
Speaker 1: on that because you know, it's tricky. The battle for
Speaker 1: inflation has kind of been declared a victory, and they're
Speaker 1: easing now or saying they're going to be easing. I
Speaker 1: think it's a question of whether easing is appropriate or
Speaker 1: whether whether inflation is going to be more sticky.
Speaker 3: Nancy, would you not say, though, that inflation still appears
Speaker 3: to be on a downward trajectory, we may see higher
Speaker 3: energy prices. This is one of the reasons the FED
Speaker 3: kind of separates that when it looks at core, but
Speaker 3: then you also have shelter that is expected to be
Speaker 3: coming down, and shelter is such a huge part of
Speaker 3: the CPI thirty odd percent or so. Isn't it likely
Speaker 3: that we'll still see it. It's just that we won't
Speaker 3: see it happen as fast as we had thought or hoped. Well.
Speaker 1: I think you bring up a great point because CPI
Speaker 1: is just an index, right, the consumer price index. It's
Speaker 1: like any other index out there. It's probably not the
Speaker 1: only way to measure inflation. It's even an index that
Speaker 1: the FED sort of discounts, right. They use survey data
Speaker 1: more or the PCE, and CPI is also the year
Speaker 1: of a year change. So I think the tricky thing
Speaker 1: is CPI has been coming down and people expect Shelter
Speaker 1: to really drive sort of the downward trajectory. But I
Speaker 1: think if you look at average Americans and their real
Speaker 1: life cost a living, it's not really come down, like
Speaker 1: things are quite still expensive. Of lots of things are
Speaker 1: feeling quite inflationary in the day to day wives. So
Speaker 1: you have CPI saying one thing, and then it's also
Speaker 1: so sorted from the as you point out the rent component,
Speaker 1: which is about a third.
Speaker 2: So earning season kicks off Friday, we get the big banks,
Speaker 2: JP Morgan Wells City Group. I mean, how do you
Speaker 2: think earning season is going to shape up this year
Speaker 2: for the first quarter.
Speaker 1: Well, it's tricky with the banks because the US yield
Speaker 1: curve is still massively inverted. So what that means is
Speaker 1: long dated yields in the US are lower than short
Speaker 1: dated yields, and that's really tricky for a bank. Also,
Speaker 1: trading volumes haven't been tremendous. Everything is sort of going
Speaker 1: up this year, right, twenty twenty four has been sort
Speaker 1: of the everything is amazing. Everything is rallying. I think
Speaker 1: the one thing that is falling is inflation expectations, but
Speaker 1: besides that, everything else is up, So it's it's definitely
Speaker 1: a tricky time for earnings. And I i'm you know,
Speaker 1: I'm I think the yield curve being so inverted in
Speaker 1: the US is also a pain point for the banks.
Speaker 3: I know that the appearance is that everything goes up
Speaker 3: and the indexes have but individual stocks, I mean, plenty
Speaker 3: are getting really punished. I mean, you just look at
Speaker 3: a company like Lululemon, came out with its earnings, wasn't
Speaker 3: really all that bad, didn't give a strong forecast, and
Speaker 3: was slammed. So I mean, I don't think that's a
Speaker 3: good thing or a bad thing, but I do think
Speaker 3: it makes for an interesting time for you know, stock.
Speaker 1: Picking, definitely. I mean, the market is quite complacent right now.
Speaker 1: If you think back to twenty twenty two, when everything
Speaker 1: was going down, the you know, sentiment was really terrible.
Speaker 1: Right now, it's kind of opposite day where everybody is
Speaker 1: very soft landing. Everything's fine, the Fed's going to cut
Speaker 1: Inflation's not a problem. Everyone is super complacent that things
Speaker 1: are going to be okay. And I think that's the
Speaker 1: time that investors should really prick up and be worried.
Speaker 1: Right when everyone gets very complacent, that's kind of when
Speaker 1: surprises can happen.
Speaker 2: Are you more exposed to the US right now than
Speaker 2: you are to markets offshore?
Speaker 1: So I manage two fixed income funds that are both
Speaker 1: treasury funds, So for my my portfolio management is very
Speaker 1: focused on the US. But that's by perspectus. So, but
Speaker 1: I do think there are a lot of great opportunities
Speaker 1: out there in emerging markets, in fixing everyone in fixed
Speaker 1: income and even equities, you know, going talking about complacency,
Speaker 1: you know, there are certain markets that everyone hates, you know,
Speaker 1: like it's I guess being a contrarian. I think it's
Speaker 1: always interesting to look at the things that are out
Speaker 1: of favor or the things that people don't expect.
Speaker 3: Where do you see some of the best value in
Speaker 3: local currency em fixed in.
Speaker 1: Well, everyone's really excited about Japan right now. They've just
Speaker 1: changed their yield curve control ended that it's a new
Speaker 1: kind of regime, a new governor, and so I think
Speaker 1: a lot of people are looking at Japan to say, hey,
Speaker 1: are we going to have a new you know, kind
Speaker 1: of a new era to get out of this this
Speaker 1: decade long deflation and have more interesting markets. But Japan
Speaker 1: has always been the widow maker with people trying to
Speaker 1: play for higher yields. So it's also, you know, it's
Speaker 1: so you know, betting that bonds jgb's sell off has
Speaker 1: really been a really really tricky and bad thing to play.
Speaker 2: So to play to your strength. I mean, if you're
Speaker 2: focused on US treasuries, let's talk about the shorter end
Speaker 2: of the curve. Here is the two year of screaming
Speaker 2: by at four seventy five.
Speaker 1: I don't think so the you know, it's really I
Speaker 1: think two year yields probably will be going low. But
Speaker 1: I think if you're going to look at the front end,
Speaker 1: you know, if you pull up your Bloomberg terminal and
Speaker 1: you tape p X one, that's the code to look
Speaker 1: at the t bill market, and you can see you
Speaker 1: can buy a one year, one month te bill and
Speaker 1: get paid five point three percent, right, So why you know,
Speaker 1: I feel like, if you're going to stay in the
Speaker 1: short end, don't really make a bet about whether the
Speaker 1: Fed how many times they're going to cut, because that's
Speaker 1: what you're getting.
Speaker 6: Whereas I think.
Speaker 1: The long end of the curve. You know you're not.
Speaker 1: That's a negative term premium, so you're really not getting
Speaker 1: paid to take that risk.
Speaker 3: All right, Nancy, thanks very much for joining us. Nancy Davis,
Speaker 3: founder and portfolio manager at Quadratic Capital Management.
Speaker 2: Let's get to our guests. Stephen Schoenfeld is with us.
Speaker 2: Stephen is the CEO at market Vector's Indexes. He joins
Speaker 2: us from here in New York City. Good of you
Speaker 2: to stop by. I want to begin by what appears
Speaker 2: to be, if you look at the jobs data, a
Speaker 2: reacceleration of the American economy, and I think it's fair
Speaker 2: to say a real risk that interest rates may need
Speaker 2: to remain elevated for much longer than the market had
Speaker 2: been predicting, or at least the FED had been guiding.
Speaker 3: On.
Speaker 2: Last week, we heard from Neil Keshgard, the head of
Speaker 2: the Minneapolis FED, saying, maybe we don't get any rate
Speaker 2: cuts this year. Are you prepared for that possibility?
Speaker 5: Well, certainly the economy keeps on humming. It seems quite
Speaker 5: impervious to a slowdown, and the FED speak toward the
Speaker 5: end of last week, after Chairman Powell was a little
Speaker 5: bit more hawkish, but there's no clear signs yet that
Speaker 5: the voting, when it happens again, will will choose to postpone.
Speaker 5: But even if it does, we've now entered April, and
Speaker 5: to me, if the US equity markets are going to
Speaker 5: keep moving higher, it's a little bit less about interest rates.
Speaker 5: It's more about earnings, and we're going to start to
Speaker 5: see earnings this week, and so we're going to need earnings.
Speaker 5: Growth expectations are around three to three and a half
Speaker 5: percent for the S and P five hundred as a whole.
Speaker 5: If companies deliver, it could actually further insulate the market
Speaker 5: from let's call it non loosening fears, right or a
Speaker 5: longer pace before we see some interest rate cuts.
Speaker 3: I think if you just use good old common sense,
Speaker 3: with the economy this strong, and the fact that the
Speaker 3: recent earnings were already pretty strong, you could get some
Speaker 3: blowout stock gains in this next earning season because some
Speaker 3: of these companies, particularly the in the AI related space,
Speaker 3: are perhaps bound to have some very strong numbers'll just
Speaker 3: and that'll just you know, spike up the denominator and
Speaker 3: bring the pees down, and you know, and investors will
Speaker 3: be seduced by that. That's a kind of prediction from
Speaker 3: a journalist. As journalists covering this stuff, we're all sort
Speaker 3: of Monday morning strategists, as it were.
Speaker 5: Well, certainly in big tech, in financials, in the areas
Speaker 5: that have been leading and are the biggest weights in
Speaker 5: the main market cap indexes, you are going to need
Speaker 5: some blowout earnings to to make these valuations reasonable. I
Speaker 5: think where we might see the real surprises could be
Speaker 5: in energy materials, the sectors that have not been in
Speaker 5: favor and yet fundamentals are supporting them. It's hard to
Speaker 5: do technical analysis on radio, but if you look at
Speaker 5: the SMP energy sector, it actually made all time highs
Speaker 5: last week and seems poised to go higher. So I
Speaker 5: do think they'll be earning surprises. We've been generally surprised
Speaker 5: on the upside on all the other economic statistics. The
Speaker 5: question we still will see, and which will make April interesting,
Speaker 5: is where those positive earnings are going to be surprising
Speaker 5: the market.
Speaker 2: Well assume for the moment that some of that has
Speaker 2: already been discounted. I mean, witness the advance that we
Speaker 2: had in stocks Friday. I'm wondering whether or not it's
Speaker 2: the forecast part of the story that's even more important.
Speaker 5: Yeah. I mean, look, I think analysts have been adjusting
Speaker 5: their estimates coming in. We've seen x post reduction of
Speaker 5: estimates for you former high flyers like Tesla, and I
Speaker 5: think you know, people are getting a little less excited
Speaker 5: about another one of the Magnificent seven Apple, but there's
Speaker 5: still plenty of room. I would be very surprised if
Speaker 5: in Nvidia doesn't surprise again on the upside, which seems
Speaker 5: hard to believe given how consistently it's been doing it.
Speaker 5: But they're right there in the center of the AI story.
Speaker 3: And just for fun, let me take the opposite side
Speaker 3: of a point you made a few moments ago about
Speaker 3: about the rotation may may benefit even more. I would
Speaker 3: say that there's a chance that rotation takes a pause
Speaker 3: here because the earnings could be so strong for those
Speaker 3: AI related companies and it's not just AI, but it's
Speaker 3: it's also you know, the momentum place like Eli, Lilly
Speaker 3: and Novo nor Disc and those those types of companies
Speaker 3: just not just AI, but the money may flow back
Speaker 3: into them and put rotation on hold. Can you count that?
Speaker 5: Yeah, I mean, the whole notion of rotation and rotation
Speaker 5: tends to happen in a healthy and bullish market, is
Speaker 5: that the high paying sectors take a pause. They don't
Speaker 5: always fall. Pharma definitely can still go further, but you
Speaker 5: get new leadership. And it wouldn't be in Congress for
Speaker 5: there to be positive earnings on the momentum on the
Speaker 5: companies that led the market in the fourth quarter, but
Speaker 5: still have the areas that have been out of favor,
Speaker 5: like materials and energy continuing to go up. And I
Speaker 5: certainly expect that it's hard to ignore what we saw
Speaker 5: with energy prices and with the main oil and gas companies,
Speaker 5: as well as what we're beginning to see, in my opinion,
Speaker 5: in precious metal minors.
Speaker 2: Yeah, no doubt about that, with gold and an all
Speaker 2: time high. Stephen, thank you so much for making time
Speaker 2: to chat with us. Stephen Schoenfeld as the CEO of
Speaker 2: Market Vector Indexes. This has been the Bloomberg Daybreak Asia podcast,
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