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Speaker 2: This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.
Speaker 2: You can join Brian Curtis and myself for the stories,
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Speaker 3: Joining us for a look at markets now is John Lynch,
Speaker 3: CIO at Comerica Wealth Management. John, it's kind of a
Speaker 3: conflicted bull market that we have here at the moment.
Speaker 3: I'm curious whether you see the CPI report this week
Speaker 3: or the Fed decision and its dot plots likely to
Speaker 3: change much this week.
Speaker 4: Hey Brian, good morning. Yes, I think first off, on
Speaker 4: the CPI report, I noticed earlier the Bloomberg consensus is
Speaker 4: only calling for one tenth of one percent increase month
Speaker 4: over months, and I think that's a bit of a stretch.
Speaker 4: I think that's a little optimistic. We've seen really good
Speaker 4: job growth, we saw a rebound in services. Auto sales
Speaker 4: are approaching sixteen million at a seasonally adjusted at annual rate,
Speaker 4: So I think that the street might be in for
Speaker 4: a disappointment on the month over month data on headline
Speaker 4: CPI to the degree core CPI comes in about three tenths,
Speaker 4: hopefully that'll be the saving grace, but I do think
Speaker 4: investors should be mindful of that month over month print.
Speaker 4: And to your point on the FOMC, I guess at
Speaker 4: the end of the March meeting, the dot plot was
Speaker 4: for three cuts this year. As you know, FED fun
Speaker 4: futures are looking at exactly half that amount, and it'll
Speaker 4: be very interesting to see whether or not they come
Speaker 4: out with one or two.
Speaker 2: So do you think there's a real risk then the
Speaker 2: bond market maybe sees a little bit of weakness and
Speaker 2: we have a popping yield right now. The last couple
Speaker 2: of days have seen a dramatic decline in yield, and
Speaker 2: I saw the way in which bank stocks were squeezed,
Speaker 2: particularly today. Do you think there's a risk that yields
Speaker 2: pop from here?
Speaker 4: I do. I think. You know, we've been looking even globally,
Speaker 4: we've been in a downward trend, but we saw surprisingly
Speaker 4: strong demand for the thirty year I guess we had.
Speaker 4: I'm sorry for the tenure auction today there were thirty
Speaker 4: nine billion, I think, and we met with really strong demand.
Speaker 4: So we're right in that, you know, lower bound of
Speaker 4: the four thirty to four to seventy range that we've
Speaker 4: been trading in. We're about I guess we closed at
Speaker 4: four forty, but yeah, we could we could see a
Speaker 4: pop you know, five to ten basis points. Should that
Speaker 4: month over month number disappoint.
Speaker 3: Yeah, it seems like that there was quite a lot
Speaker 3: of relief today with the Treasury auction that you know
Speaker 3: that there was demand, strong demand. Why do you think
Speaker 3: there was given you know, the previous somewhat failed auctions
Speaker 3: and the fears that you know, at some point the
Speaker 3: bond vigilantes will be you know back in forth.
Speaker 4: You use the perfect word. It was relief. It didn't
Speaker 4: seem like confidence to me at all. I think it
Speaker 4: was very very much relief given the uh, you know,
Speaker 4: the poor auctions that we saw in fives and sevens
Speaker 4: over the past couple of weeks. So I just think,
Speaker 4: you know, the bond market is really in you know,
Speaker 4: right in the mid fes. You know, we could really
Speaker 4: frankly break either way. You know, if you if you
Speaker 4: think about all the money that's been spent post pandemic
Speaker 4: death sit spending you know, we're one point six one
Speaker 4: point seven trillion budget deficit in spite of four percent GDP.
Speaker 4: I mean, that's not a full employment type reed, So
Speaker 4: you could break upwards over the next six or twelve
Speaker 4: months on that or heaven forbid, you know, we have
Speaker 4: you know, a worse geopolitical situation which could see us
Speaker 4: break lower. So I think, you know, again very instructive
Speaker 4: that you use the word relief because I think bond
Speaker 4: investors are kind of straddling the fence on that.
Speaker 5: John.
Speaker 2: I'd like to get your view on what you're seeing
Speaker 2: with respect to this artificial intelligence trade. Yesterday we had
Speaker 2: Apple unveiling this new platform called Apple Intelligence. May be
Speaker 2: a delayed response today. The stock was weak yesterday, but
Speaker 2: I think analysts kind of weighing in on the fact
Speaker 2: that maybe this creates an upgrade cycle for the latest
Speaker 2: diversion of the iPhone, and today Apple shares pop more
Speaker 2: than seven percent to a record. Are you still a
Speaker 2: buyer this AI theme?
Speaker 4: You know, it's interesting. Apple was faced a great deal
Speaker 4: of criticism yesterday on the rollout, but I think I
Speaker 4: don't know if you want to say cooler heads prevailed
Speaker 4: or more optimistic heads prevailed today. Yeah, the A I
Speaker 4: think you know, I'm still I'm still behind it. You know,
Speaker 4: I've been asked a lot about nineteen ninety nine and
Speaker 4: when I just see you know, if you want to
Speaker 4: use the Cisco VERSUS Microsoft or currently Apple or Nvidia example,
Speaker 4: multiples are very different. It's a different type of scenario.
Speaker 4: The growth companies driving this not only have earnings, but
Speaker 4: they have significant cash flows and they're trading at significantly
Speaker 4: better multiples than we saw some of the leaders twenty
Speaker 4: five years ago. So yeah, I'm still behind it. I
Speaker 4: like the fact that businesses are confident enough to spend,
Speaker 4: and you know, we saw durable goods orders, right, so
Speaker 4: business spending on employees and they're spending on orders. And
Speaker 4: to the degree that you're seeing even within the tech space,
Speaker 4: semiconductors outperform software, so that that's a pretty good cyclical
Speaker 4: indication at this point in the cycle. And you can
Speaker 4: even see that on equal weight basis as well.
Speaker 3: So I want to give you a quote, and I
Speaker 3: want to you know, sort of introduce you to the
Speaker 3: reporter's notebook for why I'm quoting this. You know, I'll
Speaker 3: get up at three o'clock in the morning for the
Speaker 3: show and sometimes wake up at about one, and you know,
Speaker 3: I just get my book and read for a while
Speaker 3: and hope to go back to sleep. So I read
Speaker 3: this line in the book that I'm reading at the moment.
Speaker 3: It's back at the beginning of the chip industry, and
Speaker 3: I'm paraphrasing. Texas Instruments had sales of five hundred thousand
Speaker 3: dollars in nineteen fifty eight. Two years later it was
Speaker 3: twenty one million. That's sales jumping forty two times in
Speaker 3: two years. And I was thinking, hey, take that in.
Speaker 4: Vidia, absolutely good quote, and uh yeah, it's a labor
Speaker 4: of love when we wake up at that hour, isn't it.
Speaker 3: Well, you know, the point, the point really of the
Speaker 3: anecdote is that, you know, we're so surprised at you know,
Speaker 3: how fast AI is growing, but you know, we forget
Speaker 3: that there's been a number of these trends, you know,
Speaker 3: semiconductors in the early stages. We're just doubling in quadrupling
Speaker 3: and quintumpling and you name it, forty two times in
Speaker 3: two years. It's impressive.
Speaker 4: Absolutely absolutely not only were they doubling, but the prices
Speaker 4: were cut in half. Right, War's law. So you know
Speaker 4: the speed with which we've seen over the last twenty
Speaker 4: five years. You know, that's why I don't think the
Speaker 4: whole Nvidia, Taiwan Semiconductor, you know, Microsoft, you name, you
Speaker 4: name the participant or the leader in this in this shift,
Speaker 4: I still think there's room to run and when it's
Speaker 4: consistently justified with quarterly sales growth, year sales growth, you know,
Speaker 4: the margins that they're seeing. I do think it's important
Speaker 4: for investors to really think about why utilities are running
Speaker 4: and you know, we want to make sure that the
Speaker 4: electrical grid can support all these data centers that all
Speaker 4: these chips are going to populate.
Speaker 3: Yeah, it's a good point that there are a lot
Speaker 3: of companies that are not buying AI, you know, and
Speaker 3: having to expense that they're selling into it. John, thank
Speaker 3: you for joining us. John Lynch, cio at Camerica Wealth Management.
Speaker 3: Let's bring in John Bianco now partner and investment strategists
Speaker 3: that bond blocks to take a closer look. So there
Speaker 3: was quite a lot of turbulence in France, in particular
Speaker 3: with the route in French bonds, and I guess quite
Speaker 3: a few people are angered that Emmanuel Macrone called that
Speaker 3: snap election, with Bruno Lamier warning that France could be
Speaker 3: plunged into a debt crisis if Marine leapenn or to
Speaker 3: win the elections. I'm just curious about your thinking about
Speaker 3: whether that impacted the fairly strong bond auction we saw
Speaker 3: in the US.
Speaker 5: It's very possible that it did affect our bond auction here,
Speaker 5: but it's also possible that, you know, sometimes bond auctions
Speaker 5: go better than other times, and today was just a
Speaker 5: day where there was strong demand for whatever reason.
Speaker 2: Hey, Joe, and I'm hoping you brought your crystal ball
Speaker 2: with you or it's right there next to you at
Speaker 2: the desk. Give me a sense of what we're going
Speaker 2: to see tomorrow, first with the CPI and then what
Speaker 2: we're going to hear from the Fed.
Speaker 5: Yeah, it's going to be a big day tomorrow in
Speaker 5: terms of market events, with the CPI releases and the
Speaker 5: f o MC rate decision. I think that, you know,
Speaker 5: no matter what we see in terms of the CPI release,
Speaker 5: it's not like inflation is handled. Maybe we could continue
Speaker 5: to see some progress, but we're not at the point
Speaker 5: where we think that there will be a rate cut.
Speaker 5: Obviously announced tomorrow or even the July meeting. September would
Speaker 5: be potentially the first time that we could see a
Speaker 5: rate cut. But even then now the probability is less
Speaker 5: than fifty percent that we would see a rate cut
Speaker 5: in September, So it may not be until December of
Speaker 5: this year where we see the first rate cut.
Speaker 3: It's a double header tomorrow that I'd buy a ticket
Speaker 3: to see for sure. In fact, we'll have to be
Speaker 3: talking a lot about it on the show. How would
Speaker 3: you like to have Jerome Pal's job trying to explain
Speaker 3: what's really going on in the jobs market looking at
Speaker 3: the huge difference between what we saw in the establishment
Speaker 3: survey versus the household survey.
Speaker 5: Yeah, exactly. It's not an easy job that he has.
Speaker 5: But I would just say that in general, even though
Speaker 5: there can be some weaker numbers some stronger numbers, overall
Speaker 5: employment and payroll numbers are holding in at strong enough
Speaker 5: levels they're not really a real cause for concern, meaning
Speaker 5: that the Fed would have to consider cutting rates tomorrow.
Speaker 2: So do you believe that there are still opportunities in
Speaker 2: the bond market. I mean, I'm imagining that if you
Speaker 2: think the Fed could go twenty five maybe fifty basis
Speaker 2: points before the end of the year. That just on
Speaker 2: the basis of a capital gain that you may receive,
Speaker 2: there are opportunities. Am I right on that? And if so,
Speaker 2: I mean, what part of the curve are you're playing here?
Speaker 5: Yeah, No, we think there are a lot of opportunities
Speaker 5: in fixed income right now. We certainly see opportunities still
Speaker 5: in the credit markets in investment grade corporates, particularly triple
Speaker 5: B corporates, also high yield corporates, just because we do
Speaker 5: have this continued strong, these continued strong fundamentals for US corporations,
Speaker 5: and that is something that we have elevated yields. So
Speaker 5: and if the majority of the return for fixed income
Speaker 5: is from coupon income, you know you're getting you could
Speaker 5: get elevated returns in credit because of the elevated coupons.
Speaker 5: In terms of how we feel about treasuries, we're still
Speaker 5: kind of sticking to our view to focus on short
Speaker 5: to intermediate duration exposures. There it's you know, the short exposures,
Speaker 5: there's definitely I mean, you still are experiencing income in
Speaker 5: the in the low five percent range and they have
Speaker 5: lower volatility versus longer duration. US treasuries, but we also
Speaker 5: think that it's time to do some stepping out in
Speaker 5: terms of duration in order to capture not only attractive yields,
Speaker 5: but price returns that would result from potential fed actions.
Speaker 3: I'm a little curious about your high yield choices and
Speaker 3: wondering whether or not you're at the aggressive end or
Speaker 3: at maybe the more risky end. Given you what you
Speaker 3: see in commercial real estate.
Speaker 5: The high yield market has held up very well in
Speaker 5: terms of the fundamentals. We're still at interest coverage ratios
Speaker 5: and leverage ratios that we saw not since before the pandemic.
Speaker 5: There's been some softening, but in general we're not seeing
Speaker 5: a big way of downgrades. We're only really seeing one
Speaker 5: industry that is experiencing more distress TMT, but a number
Speaker 5: of the other industries are doing quite well. And in
Speaker 5: terms of the rating categories, I mean, it just depends
Speaker 5: on where you want to be in the risk spectrum.
Speaker 5: If you want less a risk, then you would probably
Speaker 5: focus on double bs and they can be a great addition.
Speaker 3: Sounds good. Thanks very much for joining us here live
Speaker 3: on the program. Join Bianco partner and investment strategist at
Speaker 3: Bond Blocks looking at China's consumer prices rising a little
Speaker 3: in May, still holding above zero. Is the fourth consecutive
Speaker 3: month that we've seen that the CPI reading of zero
Speaker 3: point three percent year on year, the survey estimate was
Speaker 3: for zero point four percent, and in terms of PPI
Speaker 3: still locked in deflation with a contraction of one point
Speaker 3: four percent. That was a little better than the survey
Speaker 3: estimate of minus one point five percent, and quite a
Speaker 3: bit better than what we saw the prior month in April,
Speaker 3: where we were down two and a half percent. Joining
Speaker 3: us now is Vanessa Chan, head of Asian Fixed Income
Speaker 3: Investments Fidelity International. So I guess not too much of
Speaker 3: a surprise, Venessa with these inflation numbers in China, but
Speaker 3: it kind of suggests and shows that it's a long
Speaker 3: road ahead to get back to normalcy.
Speaker 1: Yes, indeed, I think, as you mentioned, the numbers is
Speaker 1: probably a little bit better than market expected, kind of
Speaker 1: slightly fainted improvement. Quoting some of your colleagues earlier on
Speaker 1: what we're looking at is our longer term beyond China
Speaker 1: is a control stabilization. In general, we're looking at a
Speaker 1: GDP of five percent. Infation is probably likely to kind
Speaker 1: of hoover the relatively low level. What we've seen recently
Speaker 1: is some of the policy that's been implemented, such as
Speaker 1: the kind of Outra Lung bond, which aimed to putting
Speaker 1: more momentum or investment into the longer term infrastructure projects.
Speaker 1: Were also seeing policy related to property in terms of relaxation,
Speaker 1: and all of these is really trying to regain some
Speaker 1: of the growth momentum, particularly related to the ontore market,
Speaker 1: in order to help the kind of gradual improvement that
Speaker 1: is expected from the central government on the domestic consumption side.
Speaker 3: As well.
Speaker 2: Domestic consumption, I think there's a big question mark over that.
Speaker 2: What seems clear is that the economy is still very
Speaker 2: reliant on exports.
Speaker 3: Is it not?
Speaker 1: Yes, But I think we recognize the economy traditionally have
Speaker 1: been relying on I would say two things one well
Speaker 1: three maybe property, infrastructure, and also export. There's a very
Speaker 1: strong intention from the central government of the gradual structure
Speaker 1: change for the Chinese economy to kind of bring it
Speaker 1: back to more domestic consumption and manufacturing. So what we've
Speaker 1: seen is a kind of gradual improvement on the consumption,
Speaker 1: particularly on the surfaces side. We also see Chinese customer
Speaker 1: looking for a good value of products, and then the
Speaker 1: saving rates continue to be still quite high as well,
Speaker 1: which allowed potential longer term growth in terms of the
Speaker 1: consumption side. The other side I think is getting more
Speaker 1: interesting is that China it's moving away from producing lower
Speaker 1: value products to more higher value products, and this will
Speaker 1: probably means that it will help it to kind of
Speaker 1: broaden the export horizon. As you may see, they continue
Speaker 1: to be kind of building on capacity or capabilities related
Speaker 1: to green investments, evy vehicles, solar panels, batteries, and these
Speaker 1: are some of the areas that they've been striving to
Speaker 1: become stronger, both in terms of manufacturing export as well.
Speaker 3: Vanessa, we reported a while ago that PPI in Japan
Speaker 3: was up two point four percent a year on year numbers,
Speaker 3: and that was better than the survey estmen or higher
Speaker 3: than the survey estim It could be good for corporates.
Speaker 3: I suppose in Japan month on month it was also
Speaker 3: stronger than the survey estimate up here point seven percent,
Speaker 3: and perhaps it's making a little easier on the Bank
Speaker 3: of Japan. But I'm not sure if these numbers are
Speaker 3: even strong enough to be auguing for any kind of
Speaker 3: rate hike in the very near future. What are you
Speaker 3: expecting from the BOA.
Speaker 1: I think you're spot on if you look at the
Speaker 1: market expectations, they do expect there's going to do two
Speaker 1: hikes before they end of the twenty twenty four but
Speaker 1: looking closer in terms of the next meeting, we probably
Speaker 1: an likely to see a hike in the new future,
Speaker 1: reason being one of the key factors that the wage
Speaker 1: growth is still actually fairly gradual, and if you look
Speaker 1: at the wage growth percentage is still in the negative,
Speaker 1: so the wage and inflation dynamics is probably haven't been
Speaker 1: quite in line with the expectations that BOJ have laid out.
Speaker 1: If anything, it's probably for an opportunity for BOG to
Speaker 1: continue to communicate to the market and manage the market
Speaker 1: expectation and paving away for gradual normalization when it comes
Speaker 1: to rates.
Speaker 3: Yeah.
Speaker 5: Oh.
Speaker 2: I think the other question here is on the persistent
Speaker 2: weakness in the end and whether there's been a conversation
Speaker 2: between the Ministry of Finance and the BOJ about doing
Speaker 2: something to reduce the level of importation of inflation into
Speaker 2: the Japanese economy because at the consumer level, I think
Speaker 2: consumers are feeling that pinch. Is that wrong headed?
Speaker 1: I think if you think about on the macro fond,
Speaker 1: it's probably unlikely that BOJ is going to have much actions.
Speaker 1: I think the weaknesses on yen could be a consideration.
Speaker 1: But if you kind of hinges back in terms of
Speaker 1: the role of BOJ is really kind of looking at
Speaker 1: inflation other than thinking about the foreign currency. So that's
Speaker 1: probably where the kind of roles and responsibility definition would
Speaker 1: kind of win.
Speaker 3: I would say we're also pointing towards the CPI report
Speaker 3: in the United States coming up tomorrow, that's going to
Speaker 3: be a big one. Are expecting those numbers to surprise
Speaker 3: much or to come in fairly close.
Speaker 1: To in line I think. I think the market expectation
Speaker 1: of the general expectation is probably be coming fairly close
Speaker 1: in line with consensus. I think what is quite interesting
Speaker 1: as well is that dialing a little bit back for
Speaker 1: last week, we have a fairly interesting week where we
Speaker 1: see some weakening of the labor data, but subsequently followed
Speaker 1: by a very relatively upside surprises on the lone. Fampeiro
Speaker 1: and I think inflation will continue to be a key
Speaker 1: thing to watch when you come to the actions as well.
Speaker 3: Vanessa, thank you for coming into our studios with us
Speaker 3: live here on the radio. Vanessa Chan, head of Asian
Speaker 3: Fixed Income Investments at Fidelity International.
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